In recent years, with a fast-growing number of investors both inside and outside of Japan including ESG issues in their investment decisions, Japanese listed companies have come under pressure to disclose more ESG-related information and make it more useful for investors. However, although a large proportion of companies are showing interest towards ESG disclosure, many have struggled to understand what exactly investors are looking for, and progress has been patchy, especially outside the largest companies. Although a large number of standards, frameworks and guidance documents for ESG disclosure have been published by governments, stock exchanges, NGOs and others around the world, many Japanese companies have reported difficulty in telling these frameworks apart and confusion over how to use each one.

Japan Exchange Group, Inc. (JPX) considers this gap in understanding between corporates and investors as a barrier to improving the sustainability of Japanese companies, so with a motive to improve transparency and dialogue between the two sides, at the end of March 2020, it published a Practical Handbook for ESG Disclosure in conjunction with Tokyo Stock Exchange. The Handbook aims to provide Japanese listed companies with helpful information to refer to when looking to begin or improve voluntary ESG disclosure. There are five important features of the Handbook which explain its intentions:

1. The Handbook aims to help listed companies to link ESG issues to corporate value and disclose in a way that the links can be clearly understood. For that reason, rather than listing specific data points to disclose, it sets out issues that companies will come across when considering ESG disclosure, gives related points to consider regarding these issues, and suggests processes that companies may wish to follow.
2. To encourage disclosure of information useful to investors for making investment decisions, the Handbook was created in consultation with various asset owners, asset managers and others from the investment community, and incorporates their points of view.
3. Each step in the Handbook has been chosen with reference to existing frameworks (TCFD, SASB, IIRC, GRI etc.), and the relevant parts of each framework are clearly specified, making it easier for readers to refer back.
4. Each step is illustrated with examples of disclosure from real companies, so that readers can form a realistic image of the processes involved.
5. The Handbook is designed so that rather than reading front to back, each company can choose which parts to refer to depending on their current circumstances.

The Handbook sets out issues that companies come across when looking into ESG disclosure, splitting them into four Steps which each include suggestions of related processes and other points to consider. These Steps and the sections within them are shown below:

To help set out why disclosure of ESG information is important, Step 1 includes explanations of ESG and how it relates to corporate value, along with various background information on ESG investment such as its relation to fiduciary duty, the diverse ways in which it is carried out, and the situation in Japan specifically.

Step 2 includes two main aims: to help companies consider how ESG issues can impact their business model and strategy as either risks or opportunities, and to help companies identify which ESG issues are of particular importance (or "material") to their business. Based on disclosure from real companies, this Step suggests making a longlist of ESG issues using analysis of the business environment and existing ESG disclosure frameworks, etc., before evaluating which of these are material using factors such as their importance to the company and their importance to investors.

Step 3 focuses on how a company can make sure its material ESG issues are reflected in its future activities. Firstly, it suggests ways to incorporate them into the structure of the company's decision-making process, stressing the importance of commitment from the company leadership and a strong governance system. Secondly, it suggests setting metrics and targets to manage progress on each issue.

All of these processes are brought together in Step 4, which aims to help companies organise the contents of their disclosure, what platform to disclose on, and how to use their disclosure to engage in purposeful dialogue with investors. This Step stresses that disclosure should paint a clear picture of how material issues link to corporate value.

We hope that by reading the Handbook companies can gain a better understanding of what investors are looking for. However, the Handbook does stress that as investors are very diverse, the best way to understand their specific needs is to proactively engage. Even if a company does not feel it has enough information to disclose, any amount of disclosure leads to more purposeful engagement, leading in turn to further improvements in ESG activities and better disclosure. Our vision is that all listed companies in Japan, no matter what size, will be able to enter this cycle, leading to a more sustainable economy.

For investors, we have two requests. Firstly, as well as raising awareness of the Handbook among investee companies, we ask that when engaging, investors could try their best to communicate what kind of corporate information they see as useful to investment decisions, and how this information is used. Secondly, over the next few months, JPX plans to deepen understanding of the Handbook among listed companies through online seminars and other resources. We are looking for partners to be involved in making these resources to give more depth to the contents of the Handbook, and further bridge the gap in understanding between investors and companies. Investors who would like to take part should contact the JPX Sustainability Committee at sustainability@jpx.co.jp.

It is crucial that engagement is a two-way exercise, and we hope that investors will work with us to help improve the sustainability of Japanese companies.